Deposit Insurance Without Commitment: Wall St. Versus Main St
This paper studies the provision of deposit insurance without commitment in an economy with heterogenous households. When households are identical, deposit insurance will be provided ex post to reap insurance gains. But the ex post provision of deposit insurance redistributes consumption when households differ in their claims on the banking system as well as in their tax obligations to finance the deposit insurance. Deposit insurance will not be provided ex post if it requires a (socially) undesirable redistribution of consumption which outweighs insurance gains.
Russell Cooper is grateful to the NSF for financial support. Comments from Todd Keister, Antoine Martin, Jonathan Willis and seminar participants at the Banque de France, the University of Bologna, the RMM Conference 2010 at the University of Toronto, Washington University at St. Louis, the Riksbank and the Federal Reserve Bank of Kansas City are appreciated. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.